Cryptocurrencies fail as substitute for gold

By Lee Min-hyung

Major cryptocurrency prices are plunging amid the escalating geopolitical risk of an armed conflict between Russia and Ukraine.

Cryptocurrencies ― such as Bitcoin and Ethereum ― had once been considered a possible substitute for gold back in 2020 when their valuation started surging. Their valuation has since fluctuated from time to time, but the two representative cryptocurrencies continued gaining strong confidence from investors as the safest digital assets.

But any gains have come to an end for the time being, as they are extending losses due to investors' preferences for conventional safe assets ― such as gold and the dollar ― at a time when geopolitical risks are high and the timeline for the U.S. Fed's planned rate hike is drawing closer.

The price of Bitcoin dropped by around 15 percent on Tuesday from a week earlier. Bitcoin is traded at around 45 million won ($37,641). This figure amounts to a drop of more than 40 percent after its price set a new record high of 82 million won in November.

But the price of gold has been rapidly rising during the same period. Gold was traded at 73,357 won per gram here on Tuesday, up by more than 8 percent from Nov. 1 of last year.

This situation indicates that gold has played its role as a representative safe asset during this period of market volatility.

The recent price movement of cryptocurrencies stood in line with that of emerging market stocks. This volatility signals that cryptocurrencies still have a long way to go to win the status of safe assets.

Starting this year, the benchmark KOSPI has been on the decline. The main bourse slightly bounced back at the end of January, but has since lost its momentum for a rebound amid widening external risk factors.

The U.S. dollar is also strengthening its valuation against the Korean won. After hitting a three-year low of around 1,100 won back in January 2021, the dollar has since gained ground against the local currency. The won-dollar exchange rate is hovering within a band of 1,190 and 1,200 won per dollar on the preference for safe assets.

The trend will likely continue at least until March when the Fed is expected to raise the key rate for the first time after cutting it to a near-zero figure due to the pandemic outbreak in 2020.

“The won-dollar exchange rate is unlikely to fall below the 1,200-won mark due to lingering uncertainty over the Ukraine crisis,” Hi Investment & Securities analyst Park Sang-hyun said.